Commentary: Good Pensions, Bad Sales PitchMike Mcnamee
Evelyn F. Adams opened her mail last May and saw red. The 23-year IBM veteran was shocked to discover that the computer giant's pension overhaul would cut her benefits by 26%. She would now have to work until 2012 to get the same amount that IBM would have paid her in 2006 under the old plan. She was still irate after Big Blue backpedaled to allow her and 35,000 other workers in their forties to stay in the old pension plan. So irate that she came to Washington on Sept. 21 to urge Congress to crack down on the new "cash-balance" pensions adopted by IBM and some 300 other companies. "I want to make sure this never happens to another American worker," she says.
Only a Grinch could dismiss the pain felt by longtime workers whose companies cut pensions. But outrage is no substitute for logic. And by any test of logic, in today's economy, cash-balance pensions are better--for workers and employers--than traditional pension plans. Companies like IBM have run into trouble not because of the cash-balance plans themselves, but by introducing them badly. It's no surprise that IBM's initial offer prompted protests from Vermont to Minnesota and helped bring the issue before Congress.
Now that it's there, it's important for lawmakers to understand what's really at stake. Cash-balance plans are a hybrid. Like traditional pensions, called defined-benefit plans, they are almost always funded by employers. But as in defined-contribution plans--like 401(k)s--their payout is based on what builds up in the worker's account, not a formula based on years of service and pre-retirement pay.
Most significantly, a cash-balance plan's funding is spread across a worker's career. By contrast, traditional pensions accrue most of their benefits in the last decade of work.
That difference makes cash-balance plans better for mobile workers. Take a young worker hired at $29,000. Under a cash-balance plan, if she changed jobs after five years, she could claim $7,000 to roll over to an individual retirement account. But she would collect only $3,700 from a traditional pension. Traditional plans fit workers whose careers are spent at one company--but they're a shrinking minority. "One in nine workers sticks with one company for 30 years," says Eric P. Lofgren, director of benefits consulting for Watson Wyatt Worldwide. "The other eight will do better with a cash-balance plan."
Employers gain several advantages in the switch to cash-balance: They can beef up their balance sheets by claiming surpluses built up in their pension funds and cut retirement costs. They can also redirect dollars to other benefits. Moreover, workers like to see just how much their funds are growing. Finally, managements struggling to staunch a "brain drain" of experienced workers can ditch the financial incentives built into many traditional pensions that encourage retirement at 55.
The switch creates some losers, usually folks like Adams--mid-career workers, who had counted on fat benefits accruing in their 50s and 60s. But there are ways to make the conversion more equitable. More than 75% of companies that convert let their most senior workers keep the old plan, according to accountant PricewaterhouseCoopers. Employers also can avoid trouble by boosting already earned pension credits or adding stock purchase plans or richer 401(k) matches.
TIME TO THINK. Take Motorola Inc., which will switch next July from a traditional plan to a pension equity plan (similar to cash-balance). Each of its 70,000 workers has nine months to decide whether to stay with the old plan or switch. The company is launching seminars and online calculators to help employees understand the options. "Time and education to make an informed choice--those are key," says Rick Dorazil, Motorola vice-president for global rewards.
Companies that have watched IBM stumble don't need Congress to tell them how to help workers caught in a switch. Instead, it should focus on a real problem: Crafting policy that will help companies find ways to offer pensions to the half of U.S. workers who don't have them now.